Controversy: Are Antitrust Laws Immoral? A Response to Jeffrey Tucker

Elzinga, Kenneth G., Journal of Markets & Morality

Antitrust As Protection Against Cartels

Perform with me a gedanken experiment. Imagine, if you would, three product markets, each supplied by several firms, who are vying with one another for customer patronage. In the first market, the firms tire of competing against each other. So they divide up the market geographically, each firm agreeing not to poach on customers outside one another's designated territory. In the second market, sellers become unhappy with prevailing prices. So they agree to a floor price below which sales will not be made. The floor price represents an increase over past prices. To underscore their agreement, each firm deposits a sum of money payable to others in the price-fixing ring if that firm is ever observed cutting prices. In the third market, prices are determined by competitive bidding. Sellers can restrain their enthusiasm for prevailing price levels so they meet in advance in order to escalate the bid price. At each meeting they determine which firm among them will win a particular bid. The other sellers submit fictitiously high prices with the understanding that they will receive a side-payment from the successful bidder or that they will be permitted to bid without genuine opposition on future bid solicitations.

Economists recognize each of these collective strategies as a variation of cartel behavior. Antitrust lawyers recognize each as being illegal per se under federal antitrust laws. Notwithstanding the legal prohibition on cartels in the United States, Jeffrey Tucker claims that the "moral burden of proof is on the side of those who advocate antitrust policies, and that burden has yet to be born."

To begin bearing the burden, let me suggest the Bible's ninth commandment. When a company holds itself out to its customers as an independent center of initiative in the marketplace, yet buyers are never informed that the market has been parceled out, or that a floor price has been set, or that the bidding is phony, the firms in the cartel have born false witness. Antitrust laws that deter cartels are deterring the bearing of false witness. Participants in a cartel bear false witness whether the cartel raises prices and restricts output by large amounts or small; participants in a cartel bear false witness notwithstanding centrifugal incentives for cartels to come undone by members cheating on the agreement.

Jeffrey Tucker's critique of antitrust never specifically discusses antitrust's prohibition of cartels, but since he endorses no element of federal antitrust policy, I take his condemnation of antitrust to be a blanket one. That Tucker never discusses cartels is peculiar. The meat and potatoes of antitrust enforcement in the United States is ferreting out cartels. Presumably, Tucker would abandon this kind of antitrust enforcement. In so doing, there would be several consequences for consumers.

First, without antitrust deterrence, there will be more cartels. Deciding to form a cartel involves the calculation of prospective costs and benefits. Sans antitrust, the primary cost to cartelization will be the coordination costs (since there will be no financial penalties to pay, or incarceration to endure, if caught). The major economic hindrances to cartelization will be the free rider problem, cheating by members, and fending off prospective new entrants. Second, without antitrust deterrence of cartels, consumers who perceive themselves as aggrieved by the absence of competition would turn to politicians who might respond with burdensome government regulations on business. Antitrust, in principle, sets the rules of the game, but not the outcome. Absent antitrust enforcement, the regulations politicians substitute might directly involve the government in price and output determination that would be more obstructive than antitrust's more limited restrictions upon freedom of contracting. Tucker never mentions the economic advantages consumers now enjoy because of deregulation that came about because antitrust was offered as a substitute for direct government regulation of price and entry. …

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